Winning at Defense by Playing Offense: Discrediting by Target Firms in Activist Hedge Fund Campaigns

Prior research highlights the far-reaching strategic and governance consequences for firms targeted in activist hedge fund (AHF) campaigns. Yet, how target firm executives and directors can effectively defend against these campaigns remains underexplored. Drawing on impression management (IM) theory, we reason that executives and directors use discrediting in their public rebuttal letters to negatively influence shareholders’ evaluations of AHFs’ reputation. To nuance this prediction, we develop a taxonomy distinguishing between source-focused discrediting, which directly attacks AHFs’ reputation, and message-focused discrediting, which challenges the validity of AHFs’ claims to indirectly tarnish their reputation. We theorize that both discrediting subtypes enhance target firms’ defense success, particularly when deployed in combination. Adopting a temporal perspective on IM theory, we further argue that the effectiveness of discrediting diminishes as more time elapses between an AHF’s public attack and executives and directors’ rebuttal. A manual content analysis of 841 rebuttal letters issued during U.S. AHF campaigns (2000–2023) provides robust support for these predictions. Beyond contributing to shareholder activism research by offering new insights into the determinants of campaign outcomes, our study advances IM theory by conceptualizing discrediting as a multidimensional influence tactic and exploring its effectiveness and temporal dynamics in adversarial contexts.